There are positives to insolvency and bankruptcy issues but you need to stay on top of the situation and avoid problems by exercising due diligence.
Even the strongest companies will encounter a situation where one of their customers or a supplier gets into trouble. Jeffrey Carhart, a partner with the law firm Miller Thomson and an expert in corporate bankruptcy and insolvency, offers the following insights when someone else’s red ink threatens to stain your balance sheet:
Seek security. If a really important customer is in trouble, obtain security in unpaid inventory or equipment whenever possible. There are rules under Personal Property Security Act legislation that allow a supplier to do so relatively easily and on the basis that it will “slot into first place” in terms of the specific inventory provided. Although rare, it may be possible under the Companies’ Creditors Arrangement Act (CCAA) for the debtor to designate a supplier as being “critical” and that may pave the way to getting pre-filing accounts receivables paid.
Stay on top of the situation. Most CCAA proceedings are based around a sale process rather than reorganization. The debtor may try to assign your supply contract without your consent or participation so be prepared to assert your rights.
Canada has a remedy that allows unpaid suppliers to try to recover “30- day goods” in a receivership or a bankruptcy situation, but not in a CCAA situation – and a number of picky requirements must be met.
There are positives. Be alert to opportunities that involve acquiring a competitor or market share, but understand the process. You’ll be asked to buy the assets “as is/where is” and there won’t be long lists of representations and warranties; therefore, take out all of your concerns through the price agreement. Usually the process is competitive. Make your offer look the best while not giving away something that’s critical for your protection.
Exercise due diligence. If you take on employees, know exactly what is owing to them, and how those arrangements will be moved over to a new entity.
Manufacturers must deal with companies that are in financial trouble. Stay on top of the insolvency and bankruptcy process to avoid being hurt by it.
Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp., which specializes in the sale of privately held companies. Visit mercantilemergersacquisitions.com. Jeffrey Carhart is a bankruptcy and insolvency Partner of Miller Thomson. Visit www.millerthomson.com.
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This article appears in the Nov/Dec 2012 edition of PLANT West.